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Monthly Archives: December 2015

Office spaces are seeing higher rental yields and it is a good investment option. The existing unconsumed stock of commercial space is now in demand. The commercial office space is gaining momentum as companies are looking to consolidate or expand due to improving business sentiment. Strong demand from the e-commerce segment, followed by the information technology and IT-enabled services sector, and the banking, financial services and insurance (BFSI) segments, has resulted in high absorption levels in quality office and commercial properties.

Manufacturing sector is seeing growth as well, which feeds the commercial real estate demand. Experts feel that this is the right time to invest in commercial real estate considering high rental yields. Grade A properties deliver capital appreciation and higher rentals.

Office space continues to give better rental yields, up to 8 to 11 percent per annum.

Real Estate Investment Trusts (Reits) are expected to hit (the market) soon, liquidity premium can also benefit from the commercial space

It is advisable to invest in a property which is already leased out, since it will assure cash flows. On an average, an investment of Rs 5 crore in an office space yields Rs 40-50 lakh as annual rental income.

Since unit sizes in case of commercial real estate are much larger than residential, amounts required for investing are also much higher. Investors must, therefore, be willing to lock in higher amounts of capital.

There is no tax incentive for investing in commercial real estate; investors can look at lease rental discounting to increase their investment capability. Investors can take a loan against the potential rental income they are likely to earn from the property. The rent, in this case, is directly paid to the bank. This will enable investors to buy a bigger property.

Investors can also look at a loan against the property. In the case of lease rental discounting or LAP, rates vary from 11 to 13 per cent. The loan can be structured so that all the payments are met from lease rentals received. However, one must be wary of the risk that if the tenant vacates and a new one cannot be on-boarded immediately, it will severely affect the cash flow structure.

It is better for investors to go through funds, rather than directly in commercial space, in order to be eligible for developer margin as well.

While the media reports subdued demand for housing, the actual prices remain high. This is because residential housing space is used as a vehicle to invest black money. The tax incentives provided under section 54 allows long term exemption of capital gains if the amount of capital gains s invested into another home. This also means that the entire sale proceeds need not be reinvested but only the capital gains portion need be invested.

While Chennai is predominantly an end user market, and has more of actual users who wants to pay their taxes, it is known that money laundering ability of residential real estate is more attractive than gold.
For example, if a person with unaccounted money buys a house for Rs 50 lakh by paying, say, 50 per cent of the amount in unaccounted money and 50 per cent in accounted money. At the end of three years, the investor sells the house property to a buyer who wants to pay fully accounted white money. If the property prices are still constant at Rs 50 lakh, there are no actual capital gains, but because Rs 25 lakh had been paid in unaccounted money initially, there will be capital gains of Rs 25 lakh on paper with taxable capital gains being even lower because of indexation.

Assuming indexation of 5.25 per cent, the taxable capital gains will be approximately Rs 21 lakh. This Rs 21 lakh is again invested in another house property and if sold after three years at the same rate of Rs 21 lakh, the entire initial unaccounted money gets converted into accounted money without paying any tax.

Essentially, the entire black money gets converted into completely accounted white money in a six-year cycle without paying any tax. Add the returns that will invariably come in an investment and the availability of home loans made cheaper because of tax breaks and it is no surprise that home investment in India is a money launderer’s delight.

There are ways to help smaller investors who don’t misuse the provisions should not be affected. The option is to make the exemption under Section 54F, to be made available only if the new asset being bought is the second residential asset for that tax payer. If he buys a third asset within the next three years, then the exemption should be withdrawn.

Secondly, the entire sale consideration should need to be invested in the new residential asset for the exemption to be available. These changes will not stop money laundering, but at least it will make it more expensive for the investor and the government will get some revenue from the exercise.

Changes are also required in setting off losses from house property for any properties beyond the first two properties. At the same time, these changes will not affect genuine investors who can’t dream of owning more than two properties in their name in their lifetimes. Hopefully, these changes will be considered in the next Budget to be announced in February 2016.

The bottomline again points to corruption that exists and the huge amount palmed off as bribes for sanctions and permits in construction. The change has to begin with the Government, bureaucracy, the real estate developers and the end user will certainly stand to develop. As long as the country has laws that are ineffective and supports red tapeism, the common man can only pray that things will change for the better and wait.

The real estate sector has not seen much progress in metro cities during the last year, but Tier 2 and Tier 3 cities have witnessed transactions since the prices are lesser. There has been a marginal pick up in credit deployment of scheduled commercial banks for housing sector. It has gone up from 16.2 per cent in October 2014 to 17.6 per cent in October 2015.

Customer feels that prices are still on the higher side. But stability in prices across locations along with reduced rate of interest has instilled a confidence in customers that the markets will improve from here. The decline in launches has helped reduce inventory that was unsold.

Smaller cities have done well compared to metro cities. Coimbatore and Mysore saw demand coming in as a result of economic activity in these regions. Vapi, Surat, Ankleshwar, Baroda did well, while the metros still have unsold inventory. Cities on the outskirts of the metros like Biosar and Bahadurgah also saw activity, owing to reasons of presence of infrastructure and educational institutions giving rise to economic activity.

The absence of supply at the right places is keeping buyers at bay. Affordable housing projects in cities and projects of Haryana Urban Development Authority have seen strong demand from buyers, but this alone cannot take the sector where it needs to be in the long run.

A number of developers have started developing projects in high end luxury category, but again there is a gap in demand and supply as the options exist as to which builder to approach.

It is the perception of price correction that is keeping the buyers at bay. Developers are willing to negotiate with a customer sitting across the table and are offering to pay for stamp-duty registration, parking space or benefits such as white-goods, modular kitchen etc to the customers.

Another factor that points towards the revival of the residential housing segment is the pickup in the commercial and office space market. Experts say that logically, this should lead to a pickup in the residential housing market.

We need to know more about Chennai to understand the deluge and floods that occurred recently. When historians say that it was more than 100 years ago that the city was under deluge, there is no mention of floods then.

The city had many rivulets and rivers with catchments and flood plains and numerous depression wetlands. When it rained heavily in the catchments, the rain water flowed into rivulets and then on to the rivers and finally into the Bay of Bengal.

When the rain persisted, the rivers burst their banks and the water got into the adjoining flood plains and to the natural depression wetlands. The flood plain depressions retained the water and thus buffered the flood. The same flood plain wetlands provided a sanctuary for resident and migratory birds, fish, amphibians, reptiles and a host of aquatic vegetation. These flood plain wetlands took a long time to evaporate and while doing so, also recharged the groundwater helping flood plain agriculture.

From a rural agricultural landscape of natural wetlands and a myriad rivulets and rivers, Madras and its surroundings changed into an urban metropolis. In the process, it first reclaimed and filled up the flood plain natural wetlands, embanked the rivulets and rivers and channelized them into mere drains.

With the city’s flood abatement architecture replaced by non-porous and flat concrete jungles, there was no flood plain wetlands to hold the rains, nor were there unchanged rivulets and streams to take the water into the rivers and then on to the sea.

Since there were no laws to safeguard the water bodies, the so called development took over these areas. It is estimated that Chennai has lost majority of its 650 wetlands to such uncaring development. A classic example is the Chennai International Airport constructed over the active flood plains of the Adyar — one of the two lifeline rivers of Chennai.

While we ponder over these mistakes, let us at least make sure that we will not choke our streams and drains with polythene and other such material that will close the opportunity of excess rain water getting into the natural rivers.

With India and the US recently agreeing to implement the Foreign Account Tax Compliance Act (FATCA), NRIs in the US are looking to dispose of properties they have in India.

While the NRIs fear that the property details and capital market investment details would be shared with the US, they are willing to sell their properties outright.

The law aims to make sure that tax is paid on the income generated from residents’ overseas wealth. So before coming under scrutiny, NRIs want to exit properties. The FATCA when implemented will disclose assets worth much more than R4, 147 crore that was declared when the Indian Government opened a compliance window.

Considering the fear that US legislation can bring in, it is time the Indian government too got tough with tax evaders. There is a clear lesson in implementing tax laws here.

The Real estate regulatory bill misses out on some genuine concerns that can affect both builders and consumers. This needs to be addressed, the reason being that if a builder has to wait till all approvals are in place before commencement of work, there could be delays affecting the supply of newly built property.
The builder having to deposit 70 per cent of sale proceeds in a separate account will lead to cash being locked forcing the builders to rely on further borrowings. The interest cost of such borrowing will eventually be borne by the buyer, taking prices higher.

While the Bill focuses on keeping builders on a tight leash, it prescribes practically no action against sanctioning authorities who are vested with the powers to grant project approvals. The difficulty is in procuring a plethora of clearances from diverse set of authorities, and clearing the red tape ensuring that projects take off on time.

The bottom line is that while the Bill will inject greater transparency and accountability into the real estate sector and protect consumer rights more adequately. The lawmakers have to streamline the approval process and move towards single window clearance system to make this transition effective and to ensure fair play for the orderly growth of the sector.

Some of you may be lucky to get a 1 crore home loan for a tenure as long as 30 years. Banks are now ready to offer loans, for the takers in top six cities, for the first time after 2008. This can turn out to be a lifeline for the struggling developers who have unsold inventory. HDFC and SBI are pushing this, for salaried people in the age group of 25-30 years, who are potential high earners.

Until recently loans beyond 20 years were considered risky by banks, but rising salaries and the readiness of the youngsters to take loans that are high value, banks are now ready to offer loans upto 30 years.

With pay commission salary hikes and interest rate cuts, borrower’s eligibility will go up. This is the time when buyers who have kept away from buying, expecting price correction, will come back. In short, larger value loans are picking up and the range is between Rs 80 lakhs and Rs1.60 crores.

≈ Comments Off on More on Real Estate (Regulation and Development) Bill

Real estate developers may have to rely more on joint ventures with land owners to build projects due to paucity of funds once the regulatory bill is passed by the Parliament. This will help consolidation in the industry, since new launches may come down due to certain provisions in the Bill, favoring developers with good track record of delivery and compliance.
The Cabinet approved various amendments to the Real Estate (Regulation and Development) Bill, 2015, introducing provisions for depositing 70 per cent of the money received by builders for a project in the escrow account and punishment for violations.

The provision which prohibits presales until the land is in possession and all approvals are in place, along with the provision to escrow a portion of sales proceeds would lead to higher reliance on joint venture projects and consequently the much needed elasticity in real estate prices.

The provision in the draft Bill to escrow a portion of the sales proceeds for construction purposes will ensure timely completion and stop the diversion of funds to purchase land or for the launch of other projects. The escrow account would temporarily reduce liquidity and hence debt servicing capability of the real estate developers. The agency said the cash flow cycles for developers might get stressed during the transition phase since builders would need to await approvals prior to launch and due to the escrow provision. The sector is now closer to getting a regulator

New launches would happen with developers’ own cash flows, resulting in a responsible industry where the financial capacity of the developers will determine the extent of launches. If the Bill gets enacted, it would lead to protection of the buyer’s interest and substantial increase in transparency in the real estate development sector, the agency said.

It listed out various provisions in the Bill that are beneficial and positive for buyers like prior registration of projects and agents with regulator, information transparency about booking and construction, launch of projects only post receipt of all approvals and restriction on change in plans without consent of the buyers.

The Union Cabinet chaired by the Prime Minister Shri Narendra Modi has approved the Real Estate (Regulation and Development) Bill, 2015, as reported by the Select Committee of Rajya Sabha. The Bill will now be taken up for consideration and passing by the Parliament.

The Real Estate (Regulation and Development) Bill is a pioneering initiative to protect the interest of consumers, promote fair play in real estate transactions and to ensure timely execution of projects.

The Bill provides uniform regulatory environment to ensure speedy adjudication of disputes and orderly growth of the real estate sector. It will boost domestic and foreign investment in the Real Estate sector and help achieve the objective of Government of India to provide ‘Housing for All’ by enhanced private participation.

The Bill ensures mandatory disclosure by promoters to the customers through registration of real estate projects as well as real estate agents with the Real Estate Regulatory Authority. The Bill aims at restoring confidence of consumers in the real estate sector; by institutionalizing transparency and accountability in real estate and housing transactions which will further enable the sector to access capital and financial markets. The Bill will promote orderly growth through consequent efficient project execution, professionalism and standardization.

≈ Comments Off on Cabinet clears 20 major amendments to real estate bill

The union cabinet has approved 20 major amendments to the real estate regulatory bill, based on the recommendations of the select committee of Rajya Sabha. List here are a few changes that were recommended.
>The updated bill now mandates projects on 500 sq metres of area or with eight flats to also be registered with the regulatory authority instead of 1,000 sq metres proposed earlier, bringing in a larger number of projects under the regulator’s ambit.

>Builders have to deposit at least 70% of the sale proceeds, including land cost, in a separate escrow account to meet construction cost. Earlier proposal was 50% or less of sale proceeds.

>Builders will now have to pay equal rate of interest in case of default or delays as home buyers. What has also been changed is the liability of builders for structural defects that has been increased from the earlier two to five years now.

>Carpet area has now been clearly defined to include usable spaces like kitchen and toilets to make it clear. Garage is now to be kept out of the purview of definition of apartment and is separately defined.

>Formation of allottees associations is now mandatory within three months of allotment of majority of units in a project so that buyers get to manage facilities in the housing project.

>The bill now allows aggrieved buyers to approach 644 consumer courts which are available at the district level instead of only the real estate regulatory authorities proposed to be set up under the bill, mostly in capital cities, for redressal of grievances.

The bill now states that additional benches of Appellate Tribunals can be set up in a state if required for speedy adjudication of grievances.

A new provision has been created for imprisonment up to three years in case of promoters and up to one year in case of real estate agents and buyers for violation of orders of Appellate Tribunals or monetary penalties or both.

Also, appellate tribunals will now have to adjudicate cases in 60 days as against 90 days proposed earlier and Regulatory Authorities to dispose off complaints in 60 days while no such time limit was indicated earlier.
>The government had earlier added a few changes to the bill in December 2014, bringing commercial real estate projects under the ambit of the bill. The provisions of the bill were made applicable to all existing projects wherein sales are still in progress, and put in place a system that would require consent of two thirds of the buyers in a project for changing project plans.

>What is not included in the bill are the sanctioning authorities, making it unclear as to where to go if there is a delay in getting approvals such as plinth certificates, occupancy certificate, electricity and water connections, even after the project has taken off. Without these permissions, even a completed project cannot be offered for possession to home buyers.
>The bill will enable more transparency and accountability into the sector and transparency in turn will help bringing the cost of capital down, which will be good for both developers as well as buyers.

>The regulatory authorities would promote single window system of clearances for real estate projects that is likely to speed up construction work that now lags because of delays in getting permissions.

>The revised bill now includes an enabling provision for arranging insurance of land title, which is currently not available in the market. This will benefit buyers and sellers both in situations where the title of the land is held invalid.

Regulatory Authorities can now grade projects along with grading of promoters besides ensuring much desired digitization of land records. They will now be required to make regulations within three months of its formation as against six months proposed earlier. States will now have to make rules within six months of notification of the proposed Act as against one year earlier proposed; Allottees shall take possession of houses in two months of issuance of occupancy certificate.